Chefs' Warehouse, Inc. Q4 FY2024 earnings call

• Business activity and demand remained consistently strong through the fourth quarter with a healthy environment for the core upscale casual to higher end dining customer base.
• Delivered the first $1 billion plus revenue quarter in Chefs' Warehouse history and strong growth in gross profit dollars in March.
• Continued growing market share with strong year-over-year growth in unique item placement and new customer acquisition.
• Gross profit margins increased approximately 23 basis points; specialty category gross margin increased ~22 basis points while center-of-the-plate category gross margin decreased ~7 basis points year-over-year.
• Full-year 2024 adjusted operating expense as a percentage of gross profit dollar improved by 24 basis points versus 2023 and 92 basis points versus 2019; full-year 2024 adjusted EBITDA per employee increased 13% versus 2023 and 18% versus 2019.
• Investments in digital platform continue to contribute to margin enhancement with ~56% of customers ordering through domestic specialty locations online as of fourth quarter 2024.
• Focus on five key areas to deliver continued above industry average top line gross profit dollar and adjusted EBITDA growth as well as targeted incremental adjusted EBITDA margin improvement over the next four years.

Net sales for the quarter ended December 27, 2024 increased approximately 8.7% to $1.034 billion from $950.5 million in the fourth quarter of 2023. Specialty sales were up 11.5% over the prior year, driven by unique customer growth of approximately 4.5%, placement growth of 12.3% and specialty case growth of 6.1%. Pounds in center-of-the-plate were approximately 3.6% higher than the prior year fourth quarter. Gross profit increased 9.8% to $251 million for the fourth quarter of 2024 versus $228.6 million for the fourth quarter of 2023. Gross profit margins increased approximately 23 basis points to 24.3%. Selling, general and administrative expenses increased approximately 8.9% to $206.8 million for the fourth quarter of 2024 from $190 million for the fourth quarter of 2023. Adjusted operating expenses increased 7.7% versus the prior year fourth quarter and as a percentage of net sales, adjusted operating expenses were 17.7% for the fourth quarter of 2024.

• Estimate net sales for full-year 2025 will be in the range of $3.94 billion to $4.04 billion.
• Gross profit to be between $951 million and $976 million.
• Adjusted EBITDA to be between $233 million and $246 million.
• Expect the convertible notes maturing in 2028 to be dilutive, with fully diluted share count expected to be approximately 46.3 million to 47 million shares.

• Tariffs returning from Mexico, Canada, and Europe could impact import exposure; ability to pass through inflation or pivot sourcing is a consideration.
• Labor costs and availability, including in processing and distribution, could pose challenges; however, processing automation and efficient systems are being implemented to mitigate some risks.
• Commodity inflation, such as with eggs and beef, remains a potential headwind with volatility expected.

Q: Good morning. Thanks so much for taking the questions. So to start, you guys called out strength across the quarter. Did you see any impact from the softer industry traffic that we've heard about in December? Or did the higher income consumer just simply activated differently? And then how much of an impact have you guys seen quarter-to-date from the Southern Winter storms and the California wildfires?

A: No, I would say that the cadence during the fourth quarter was just pretty evenly solid or strong. And I think a lot of people were anticipating maybe some impact from the shorter period from Thanksgiving to Christmas, but we really didn't see that. Those three weeks were really typically strong for a holiday season. So there's really nothing to call out on the fourth quarter in terms of weather impacts or anything that we saw from a demand perspective. In terms of January and some of the weather impacts, the fires in LA did not really have a hugely material impact on us. We only had a handful of customers that actually got lost their properties. And LA is a very big wide market, geographically for us. So there was a little bit of an impact, but it's not going to have a material impact.

Q: In terms of I know it's a fluid situation, but there's a potential for tariffs coming back to play with Mexico, Canada and Europe. If that occurs, how much exposure do you have to these markets from an import perspective? And could you pass through the inflation in most cases? Or do you look to pivot sourcing?

A: Yes. I mean, historically, we went through a period of some tariff wars back years ago. I remember that we were dealing with some of the products that come from Italy and France and Spain, I believe. We have over 4,000 suppliers right now throughout our system at Chef's Warehouse. A tremendous amount of our products are domestic and we've always been able to navigate it, find other solutions and pass on. I mean, again, I think the largest sector, I think are the product lines are fruits and vegetables from Mexico. A lot of these are $20 boxes. So you're talking about a few bucks a case. I think our market; our customer base is kind of used to the ups and downs. We do sell a more high end type of operation and it's more labor cost that drives a lot of the costs. I mean, right now everybody's talking about eggs. Eggs is I think the biggest headwind we have had from the avian fluids cause eggs to go up. But when you really think about, eggs are up even if they're up $0.50 an egg, how much of that goes into a recipe to our average customer who's charging $20, $30, $40 for an entree. So there's an effect, but it's not something that really keeps me up at night.

Q: Thanks. Hi guys. Congrats on a great year. I wanted to ask maybe first on just, if you give us a little bit of an update. Chris, you mentioned labor costs and maybe you could just give us an update on what you're thinking for labor availability and inflation in 2025, if you think that's going to be in line with historical or outsized? And then just on general commodity inflation, I know in the past you've mentioned optimal scenario is 2% to 3% commodity inflation with a little bit of volatility. Just any thoughts on what you're expecting in 2025 would be helpful. And then I've got a quick follow-up?

A: Sure. Well, let me get the crystal ball out again, Peter. But I think if you back out the -- what we're seeing right now with mainly, I mean, eggs is really what's got people going crazy at this point. The chocolate market is better, but it's still inflated. But we back out those two big categories. We're kind of seeing that 2% to 3%. So I don't see anything that really would change that drastically. I mean, everyone's talking about tariffs, tariffs, tariffs, but I don't know from my seat today, I see the 2% to 3% that we talk about and probably with a little volatility and we'll hopefully the egg market, we get over the control of the Avan flu and the egg prices start to come down, give people relief. But, yes, the meat market, I mean, we all talk about the beef, not enough cattle for the next two, three years. So I don't think we're going to get much relief on that. But we're seeing stabilization. We're not seeing anything crazy besides the big headwind on the ag market. So our category managers are really doing a great job right now and I think you see the results.

Q: Great. And then just can I ask on the sales force. Can you give us an update on how the investments you guys have made in the sales force, maybe the growth rate? And where are you getting most of this talent from? Are they coming from outside the industry, within the industry? Any insight there would be helpful. Thank you.

A: Yes. Well, I didn't answer your labor question before. I mean, labor it's a hard job, working night shifts and driving big trucks in cities and delivering it up and downstairs. I mean, these people work really, really hard. It's a hard job and we like to think we pay a very fair better than most of our competitors. We try to, because we're delivering great expensive product to the best restaurants in the world. So we need to have the best team. And I don't think that that is the issue. It was obviously coming out of COVID where we really challenged. I think it's really stabilized. We have a stabilized labor force. So I don't see that as the headwind that we had before. And what was the second part of your question? I'm sorry. Oh, the sales force? Yes. I mean, we hire from the kitchens, we hire from the front of the house and we also hire people that have a passion for food, perseverance and I think from all walks of life. It's a very diverse sales force and I think it continues to get even more diverse. I think what's really been paying us off dividends is our investments in training, investments in HR, investments in recruiting, spending a lot of time, energy and more and more investment in trying to recruit the best people, because it does take time to become, I call it, to become a real CW person who could sell all our books. That takes a few years. So hiring the wrong people who leave after a year or two is a big cash drain. So I think the efforts in making sure that we're doing our best to recruit people that are going to stay. And I would say, the people that stay more than two, three years, it becomes probably the best job that they're going to have, because we don't cap people, we allow them to keep growing. And I think that story resonates. They see the success people have had at Chefs' Warehouse and I think that really helps us recruit the best people, best talent that's out there. And I think you're seeing the results of that.

Q: Hey, good morning and congrats on a great 2024. Couple follow-up questions here. The strength that we saw in gross margin, you pointed at some specific drivers around the digital ordering mix, some beneficial inflationary experience, the higher kind of case value and profitability at Hardee's. As we're looking forward for gross margin outlook for '25. Just thoughts on kind of key drivers of continued improvement and maybe if we can boil that into a magnitude that would be great.

A: Thanks for the question, Todd. I really go back to what I guess what I alluded to earlier is that the guidance implies kind of very similar kind of gross profit margins as we delivered in for the full-year of 2024. And that's really because gross profit margins are now put and are affected by things like product mix changes, et cetera, as well as obviously inflation and deflation. So once again, we're focused on driving gross profit dollars and gross profit dollar growth. So that Texas is a good example as we get more expensive boxes on Hardee's trucks. Our goal is to drive more gross profit dollar per drop per case on average and for the OpCo as a whole as we go through the year. And then the operating team is focused on managing operating expense. So I think when we build our guidance, we kind of just build in an expected gross profit range. It's not going to be perfect. And then our goal is to execute to gross profit dollar growth. So that's how we think about it.

Q: Hi guys, this is Eli on for Ben Klieve. Congrats on a strong quarter and thanks for taking my questions. First, could you provide an update on the utilization levels in the new Texas, California and Florida locations? How do these compare to your initial expectations? And are you seeing any regional trends going forward?

A: Well, we don't -- thanks for the question, Eli. We don't really disclose utilization levels by operating company or by market. But in general, in Northern California, we completed the consolidation of four processing facilities into one. We completed that move in December of 2024. And so we're in the early innings of that operation. That is really exciting. I mean, we have a lot of room for growth in that facility, and we're starting to realize the benefits of removing four separate processing facilities and getting the synergies on the operating cost side. In Texas, we've taken some additional space in Houston. We're in the process of, as I mentioned earlier, trading out of some and Chris mentioned earlier as well, trading out of some non-core business that will free up space in order to continue to grow the specialty and protein side of the business, selling to the large Hardie's customer base that we acquired with the acquisition. Getting those routes was critical to that part of the strategy. So we're doing that in a number of different markets, maybe on different levels of scale, but hopefully that gives you a sense of where we are in a multiyear path to driving the improvements in those markets from those investments.

Q: Good morning. Thanks for taking my questions. I was wondering if you could just talk a little bit more about the 4% to 7% organic growth and just help us break that down between how much high growth markets are contributing versus more mature markets and obviously tie in Texas into that conversation and just what you're learning about the Texas market and the receptivity to the categories as you integrate kind of protein and specialty there?

A: So thanks, Kelly. I'll start with a little bit about the high growth markets and the mature markets, and then I'll turn it over to Chris to add some color on Texas and the strategy there. But just on the 4% to 7%, we have a and we'll talk more about this at our Investor Day, but we have markets like Dubai and Florida and Seattle, even Southern California, Northern California, Texas, New England, where we've made either significant acquisitions that are aimed at growth and invested in capacity. And all of these markets that I'm mentioning are kind of in that group. And they're growing, I'm not going to call out specific markets, but most of them are growing double-digits, anywhere between 10% and 20%. And then our mature markets are still growing, but obviously, if you're in a market like San Francisco or L.A. or where we've been a long time, it's a very big market. We're growing through category growth. We're growing through penetration and continuing to add customers in the outer lining markets where people are working given hybrid work, et cetera. And many of those dynamics are still playing out. And so they're still growing mid-single-digits or that kind of type of growth. So hopefully that frames kind of the 4% to 7% growth. And then I'll ask Chris to just comment on your comment on Texas and the strategy there.

Q: Thanks. Good morning. Wanted to on the deck where you referenced the increase in EBITDA per employee, really a big jump last year, 13% year-over-year increase. And I think, Chris, you referenced better training and HR practices and so on. But could you give us a little more color? Is that more on the gross profit line, if you were to break it down or more on the operating leverage line? And is there sort of a bit of some catch up in there from sort of the COVID impact on productivity and people are finally learning their jobs and there's a big productivity surge. And what I'm really getting to is, is this something that is sustainable? Is it going to be a much better as you guys look at the business through 2028, much better type of employee productivity on the profit side, I would imagine on the sales side as well.

A: Yes. I'll start with the first part of your question, Andy. The 13% is really aligned with our overall EBITDA and operating leverage improvement '24 over '23. And as I mentioned earlier, it was a little uneven with a lot of that leverage coming in the fourth quarter and that's really driven by the cadence of the facility investments and when we lap them. So, yes, from a productivity perspective, I think our teams did a great job of managing headcount and managing operating spend throughout the year, and that shows up in the productivity that we -- that you're talking about on the chart. It came from both gross profit dollar growth and margin improvement. And as I mentioned, sometimes you'll get gross profit dollar growth with minimal margin improvement because you're selling more expensive boxes or you're driving the product mix that Chris talked about with different markets like Texas, et cetera. So it's all -- it's really just comes from that our teams executing on that strategy. And then I'm sorry, the last part of your question was?